Six or seven years ago, a couple I knew married each other and bought a house right away. I can’t claim to know their personal financial details, but I am sure the value of the house was well beyond three times their combined income. The husband explained to me that house values never go down, so the purchase was a good investment.
It’s true that for many years, the New Jersey county they lived in has seen incredible increases in average housing values. And according to the Housing Price Index (HPI) offered by the Office of Federal Housing Oversight, it’s quite possible that prices in their area continued to increase, although data on their town is not available. A nearby locality has seen consistent price increases from 1997 through 2006, followed by decreases in 2007 and 2008.
The methodology for determining this index is not perfect. This area has seen almost constant development in the past ten years with larger and more expensive homes being built. The HPI only counts single-family residential properties that have had two mortgages originated by Freddie Mac or Fannie Mae. Eventually, these new homes would increasingly have two mortgages as described, some sooner than others. When these larger, bigger homes enter the index, they skew the numbers higher.
While part of the index represents actual increases in house values, some of the increase is due to newer construction and the tendency to build bigger.
Meanwhile, another housing price index, the S&P Case-Shiller index, has posted the biggest decrease ever, 18% down from the same time last year. This is the 27th consecutive month showing a year-over-year decrease.
Home prices post record 18% drop, CNN Money, December 30, 2008
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{ 2 comments… read them below or add one }
Should people affected by lower housing prices do anything differently, do you think?
Two views: It feels different depending on if you live in the home or use it as investment.
I own 5 homes, and none of them have depreciated below their purchase price although the one I’m currently selling has depreciated about 10% from the peak when I should have sold. They’re investment properties so their worth is entirely measured by their net value: if the value falls then I get sad. If the value turns negative because I owe more than it’s worth then things get dangerous.
Regarding homes for living in, I think you look at it from the cash flows and timelines. Prior to the drop in value you would have owned your home in X years paying Y per month. You will still own the home in the same amount of time paying the same rate and you couldn’t do better by renting.
People who live in a home have no real issue, assuming they bought one they could afford.